HGK and hoteliers: The VAT rate in tourism should be reduced to 13 and then to 10 percent

The VAT rate for accommodation and hospitality in Croatia should be aligned with those of Mediterranean countries, such that from the beginning of 2019, the rate for both accommodation and hospitality would be 13 percent, and that it would be reduced to 10 percent over the next three to four years, is the proposal from a study on the impact of VAT rates on tourism presented on Friday at HGK.

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The study “Analysis of the Impact of VAT Rates on the Competitiveness of the Accommodation and Hospitality Sector in Croatia” was prepared by the Zagreb consulting firm HD Consulting in collaboration with several other institutions and at the initiative of the Hotel Association at HGK, and it contains, among other things, an assessment of the direct economic and fiscal effects of different VAT rates over a cumulative period of five years, from 2017 to 2021, comparing that rate in Croatia with competing Mediterranean countries and the rest of the EU.

The demands are actually very simple and in line with what competing countries, namely 25 EU member states, have, which is a VAT rate for accommodation of 10 percent, said the president of the Hotel Association at HGK and the national association of hoteliers UPUHH Ronald Korotaj, who also believes that now is the right time for tax reductions as Croatia’s tourism position is excellent, and there is also great interest from investors.

“We recently presented this study to the ministers and (…) we only want the same business conditions as our competitors and others in the EU. Therefore, we would like to hear why this is impossible or the arguments for why Croatia allows itself the luxury of having such high VAT rates in tourism, when more or less everyone, including France, Spain, Austria, and others, have had a rate of 10 percent for years, and some even lower,” said Korotaj. He does not believe it is realistic to expect a lower VAT rate next year, but he believes that the arguments they have for a reduction will stimulate serious considerations about what tourism can achieve with a lower rate.

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HGK Vice President Josip Zaher stated that the study showed that the effects of the current VAT rate of 13 percent for accommodation and 25 percent for hospitality do not yield serious positive economic effects and diminish the competitiveness of accommodation and hospitality services in hotels and camps in Croatia compared to the Mediterranean and broader EU.

Presenting the key highlights of the study on behalf of HD Consulting, Branko Bogunović emphasized that partly due to high VAT rates, investments in tourism are already lagging 40 to 50 percent behind the 7 billion euros projected in the Tourism Development Strategy until 2020.

He also pointed out that Croatia ranks 132nd and 130th out of 136 countries in the world according to the World Economic Forum’s competitiveness index and the criterion of the impact of taxation as an incentive for employment and investment in tourism, which also indicates the necessity of establishing a more competitive framework for business and tourism development.

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“In the EU, the reduced VAT rate for tourist accommodation and hospitality is recognized as an instrument for increasing competitiveness, as most EU countries apply reduced VAT rates for these services, and certain countries for other tourist services, thereby achieving a more competitive framework for business and tourism development,” Bogunović stated.

According to the data he presented, the introduction of a higher VAT on hospitality services from January 1, 2017, from 13 to 25 percent, resulted in only minor positive fiscal effects in the short term, specifically in the first year of implementation, 630 million kuna based on VAT, profit tax, and payroll taxes and contributions, which decreases year by year.

“Examples from other countries that have increased rates show that after a VAT rate increase, there will be an increase in tax evasion and the gray economy, especially in hospitality, and if they only account for 5 percent of total fiscal revenue from accommodation and 10 percent from hospitality, by 2019, the state will earn less according to the new rates than it did under the rates from 2016,” warned Bogunović, adding that the analysis emphasizes that in the long term, a VAT rate of 10 percent on accommodation and hospitality would yield greater fiscal effects as early as 2025.

Negative impact of VAT increase, an unfounded claim

Regarding the economic effects of VAT, the study indicated that the introduction of a higher VAT rate on hospitality services in 2017 had negative effects and that higher VAT rates have no basis at all.

In relation to VAT rates on accommodation and hospitality services of 10 percent, the existing rates of 13 and 25 percent in tourism cumulatively for the period 2017-2021 mean direct negative effects of 10.1 billion kuna or 41 percent less sectoral investments, and there will also be about eight thousand or even 71 percent fewer new jobs in the sector.

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Investments will also suffer, especially long-term ones, as the analysis showed that the current VAT rates mean at least 200 fewer hotels in the next 10 to 15 years.

It is also expected that the difference in long-term investment intentions between the new higher VAT rate and the reduced VAT rates on accommodation and hospitality will amount to at least 10 billion kuna by 2021. Assuming the long-term retention of the existing high VAT rates and thus a similar intensity of investment intentions by companies until 2030, Croatia would lose more than 2.5 billion euros in potential tourist investments, the study showed, among other things.